Brussels prepares to strengthen regime for struggling banks

Brussels is set to unveil plans to better shield taxpayers from bank failure by strengthening its rules for struggling lenders.

The European Commission is in the process of finalising draft legislation that makes it easier to transfer depositors’ cash to healthy institutions from troubled lenders, or to wind down a problem bank without drawing on taxpayers’ money.

The draft, seen by the Financial Times, would also make it more difficult for governments to hand over “precautionary” cash to beleaguered lenders, blocking a loophole that was deployed by Italy in 2017 to inject billions of euros of taxpayer funds into Banca Monte dei Paschi di Siena.

The details, which are still being finalised by the commission and could yet change, represent an attempt to remove powers from member states, which have resolved difficulties at smaller lenders under national regimes despite the existence of a common EU framework for bank resolution.

It would also require the European Central Bank, which supervises the biggest eurozone lenders, or national financial regulators, which oversee smaller banks, to give an early warning when a lender is at risk of “failing or likely to fail”.

The draft said the changes would ensure “a coherent application of the rules across member states, delivering a better level playing field, while protecting financial stability and depositors, preventing contagion and reducing recourse to taxpayer money”. 

The EU’s Single Resolution Board was created in 2015 in a bid to avoid resorting to the use of taxpayer funds, as governments did during the financial crisis.

The pan-Europe authority has the power to impose losses on shareholders and junior bondholders of failing lenders. But it has only dealt with failing banks twice. Last year, it oversaw the insolvency filing of the Austrian subsidiary of Russia’s Sberbank after its parent was hit by EU sanctions, and in 2017 it transferred Spain’s Banco Popular to its bigger rival Banco Santander for €1.

The draft says that instead of using the EU resolution framework, many failing lenders “have been dealt with under national regimes often involving the use of taxpayer money”. It adds that “the resolution framework did not fully deliver with respect to key overarching objectives”.

The improvements would facilitate the resolution of smaller lenders, while improving depositors’ confidence in the safety of their money, the draft said. The reforms would also reinforce the funding available to enable resolutions, including through the use of national deposit guarantee schemes.

The rules will need to be agreed by the council of ministers and European parliament, and could face a rocky ride among member states. The draft is expected to be finalised and launched later this month.

The draft is one aspect of the EU’s wider effort to complete its Banking Union, which stalled last year in the Eurogroup as ministers clashed over the sprawling agenda.

The proposals have been in the works within the European Commission since well before the turmoil in the US and Switzerland, but senior officials have cited the recent banking failures as further grounds for a shake-up of the EU regime.

Paschal Donohoe, the Eurogroup president, told the FT last month that the collapse of Silicon Valley Bank in the US “underscores the importance of Europe continuing to make progress on banking union”. The commission declined to comment.